The 2016 budget aims to stimulate economic growth and spending on high-priority socio-economic and development projects, while continuing to provide support and a positive environment for growth and investment in the private sector. Additionally, a significant reduction in subsidies, by almost two-thirds, has been identified as one of the measures to address a budget deficit arising mainly from low oil prices. Oommen John P reports.
Amid gloom over a world awash with oil oversupply, Oman’s Budget 2016 has rightly clicked the ‘Austerity’ button to face the challenging times ahead and drive forward economic growth.
HE Darwish bin Ismail al Balushi, Minister Responsible for Financial Affairs, who issued a press statement on the budget, has announced a slew of belt tightening measures including a 30 per cent plus hike in fuel prices, reduction in spending, increase in corporate taxes, visa fees and so on.
The general objectives of 2016 budget include measures to diversify revenue and rationalise expenditure, stimulate economic growth, spend on high-priority socio-economic and development projects, provide support and ideal environment for growth and investment in the private sector, and to sustain the level of basic services provided to the community. Revenue has been estimated at RO8.6bn (26 per cent lower than the 2015 budget), while expenditure has been projected at RO11.9bn. A deficit of RO3.3bn is expected in 2016, which is about 13 per cent of the GDP. Further, a significant reduction in subsidies, by almost two-thirds (64 per cent), has been identified as one of the measures to address budget deficit arising from low oil prices.
Says AbdulAziz Al Balushi, CEO, Ominvest: “The 2016 budget is a reflection of the prudent policies followed by the government and the ability to quickly adjust to challenging economic headwinds without compromising on issues of national importance. Given crude oil prices are down by 76 per cent since peak in 2014, 35 per cent in 2015 and 22 per cent so far in 2016, Oman’s government has put forth a 2016 budget that emphasises on fiscal austerity as it tries to bring unprecedented budget shortfalls under control. While 2015 budget was based on an oil price assumption of $75, the 2016 budget is based on a more conservative assumption of around $45.
Ahmed Amor Al-Esry, office managing partner, EY Oman says, “The year 2016 is expected to be a very challenging year for Oman and the region as a whole. The budget for 2016 reflects the decline in oil prices. This in turn has incentivised the government to take a number of measures to address the issue. Diversifying the revenue base and reducing dependence on oil while being rational in spending is central. To this end, withdrawal of fuel subsidy will not only reduce the budget burden, but should bring positive change in our consumption behaviour.
Mustafa Salman, chairman and CEO, United Securities, corroborates: “Oman has announced a prudent budget for 2016 with greater emphasis on economic stability. In the light of lower oil prices, the government has undertaken various fiscal reforms such as increasing the contribution of non-oil revenues by raising fees and tax as well as rationalising its overall expenditure through lower subsidies and prioritising important projects. The government will continue to spend on critical infrastructure projects as well as important sectors such as healthcare and education. Easing subsidies and increased fees would also improve the efficiency of public and private sectors, thereby reducing excessive usage of resources.
According to Lo’ai B. Bataineh, chief investment officer, Oman Arab Bank, Oman’s government has finally responded to low oil prices by cutting down spending on non-vital projects and also cutting subsidies while continuing to invest in diversifying the economy. They have also started to tighten money spending and enhance revenue collections. The fall in oil prices since mid of 2014 has slashed the net oil revenues which represent almost 80 per cent of the government revenues. This is a serious issue for the Sultanate’s economy. The only remedy is to act by increasing taxes and reducing expenses.
“We were looking forward to have a measurable and manageable deficit, mainly because of increasing current expenditures. But as we keep saying in financial terms ‘to be late doesn’t mean it is over’, I believe the initial budget plan and the discussions besides the steps which are being taken are certainly welcome. At the same time, we should not forget that the government should continue its spend on infrastructure and economic development projects such as roads, ports, airports and tourism infra-structure and facilities. This will broaden the economy and eventually reduce its dependence on oil.”
Ashok Hariharan, partner and head of tax, KPMG-Oman says: “The 2016 budget is based on a significant decline in expected oil price which has resulted in a 41 per cent reduction in oil revenue. This has necessitated a reduction in expenditure. However, the government has done well to restrict this reduction to 16 per cent as against a decline in revenue of 26 per cent. In order to avoid the deficit increasing, the government had to focus on raising revenues from other sources. Whilst the government is proposing to raise taxes and fees, the budget for 2016 shows that these revenues are almost at the same level as those budgeted in 2015. However, as compared to the 2015 actual revenues realised, the government is expecting a 25 per cent increase from taxes and fees. The Corporate Income Tax law is likely to be amended to increase the rate of tax from the current 12 per cent to 15 per cent. There is also a proposal to eliminate the income tax exemption currently available up to a taxable income of RO30,000. In order not to put significant hardship on the SME sector, the government could look at having a dual rate of tax for such businesses. The government could also be looking at expanding the scope of ‘withholding tax’ which is applicable on payments made to foreign companies who do not have a permanent establishment in Oman. For instance, they could follow the example of Saudi Arabia where withholding tax is imposed on a wide range of payments including technical and consultancy fees, dividends and interest.
Kanaga Sundar, head of research, Gulf Baader Capital Markets (GBCM), Oman says: “The current year’s budget is a reformative one. The year 2016 would be a year of reality check, in terms of lowering the total budget spending, and the focus would be remain on a reduction in subsidies. The oil and gas revenue will continue to remain a major contributor (with 72 per cent) of total revenue for 2016. The contribution from non-oil revenues is estimated to increase to RO2.5bn in the midst of efforts taken by the government towards obtaining income from wider sources.”
Subsidies and economic impact
AbdulAziz says measures in 2016 budget will translate into more than RO700mn annual savings in subsidies. This in turn will help bring down the participation and subsidies expenses to around 4.6 per cent of public expenditure against 9.3 per cent in 2015 budget. This will directly help in reducing budget deficit and the burden to cover such expenses through expensive borrowings, and eventually benefit the long term macro-economic health of the country. In addition, removal of subsidies will put more pressure on businesses to become more efficient and productive, which will benefit all stakeholders over the long term. Spending cuts and new sources of income are expected to result from key reforms initiated – a major reduction of subsidies on fuel and electricity by 64 per cent which will save over RO700mn annually, proposed increase in corporate tax rate to 15 per cent from 12 per cent, privatisation of state assets and cuts in development spending. These reforms although tough to digest in the short term will prove beneficial for the economy over the long term. Budget deficit of RO3.3bn in 2016 is to be funded primarily through borrowing of RO900mn from the international market, RO300mn from the local market, net grants of RO600m and the balance from reserves.
Robert Holtkamp, CEO, National Aluminium Products Company (NAPCO) says that spending cuts and lower subsidies cannot be avoided. “But an important point to keep in mind is that the higher the spending cut, the higher the unemployment rate will rise,” he adds. Increasing taxes is a short term policy which will damage the profitability of the local industry and make their neighbouring competitors position substantially stronger. Companies that are currently struggling with margins due to external competition will find difficulty in growth or even to sustain their current position which may lead to more unemployment.
Says P Chandrasekr, group general manager, Jawad Sultan Group of Companies: “Oman’s budget has come amidst enormous challenges not only in Oman and the region but also the whole world. The rapid decrease in the oil prices has made the macroeconomic decision for the government all the more difficult. Aggregate actual revenues are expected to reach nearly RO8.9bn, decreasing by 23 per cent compared to budget estimates. The oil prices which roughly represent 78 per cent of the total revenue dropped by around RO2.2bn i.e. 24 per cent. Naturally, meeting the deficit in revenue target has been quite daunting. The cut in fuel subsidy and increase in taxes in absolute terms though looks high. Its impact will not be great, since their percentage impact is very minimal. The cut in fuel subsidy and the consequent rise in the prices by a good number should not be highly worrisome, since the price threshold was anyway at a low level. Hence, there should not be undue alarm.
Dr Shirish M Gupte, managing director and CEO, Integration Capital and Trade (ICT) Oman, says the Sultanate’s Budget 2016 has stressed on austerity measures. Given the decline in oil prices, austerity measures were on the expected lines. But the fact is that austerity measures will affect projects. And if projects gets affected, real estate, car sales and other segments will take a hit. People are certain to feel the pinch. There will be inflationary pressures if fuel prices rise. The government will be cautious with regard to taxation as it will have long term ramifications.
Will the slowdown of China’s economy have an impact on Oman? Most likely as China is the largest importer of Oman’s crude oil, says Hatem Al Shanfari, noted economist and director of Central Bank of Oman. In the wake of continued fall in crude oil prices and slowdown of growth in certain countries, the economic stability of export destinations has now become important for oil exporting GCC countries, he adds. Pointing out that 72 per cent of the crude oil produced in Oman is being exported to China, he says the Chinese economy has slowed down and its impact is affecting countries in their neighbourhood such as Malaysia and Thailand whose economies are closely linked to the Chinese economy. Countries in the Middle East that are exporting oil to China will also be hit if Chinese economy continues to underperform. Countries such as Qatar, UAE and Kuwait will be able to break even with oil prices of around $50 a barrel. These countries have financial reserves that can last 20-30 years. Oman needs a price of more than $75 a barrel for breaking even, he adds.
Inflationary pressures
AbdulAziz says the government has announced measures like increase in fuel prices, real estate transfer fees, municipality fees on rents (currently 3 per cent), increase in electricity and water tariffs for commercial, industrial and government usage. These measures will raise costs for businesses and individuals and will inevitably create some inflationary pressures. However on the other hand, some deflationary pressures arising from reduced government spending will keep overall inflation in check. The 2016-2020 five-year plan estimates an average inflation rate of 2.9 per cent per annum.
Sectors that are directly impacted by the decline in government spending are oil and gas and construction sectors, says AbdulAziz and adds that both need to rationalise expenses and look for diversification by seeking additional streams of income, as project backlog declines significantly. In current environment, M&A and consolidation in private sector would make sense as it will reduce competitive pressures and make companies more efficient. Diversified companies with strong balance sheets and market leadership position will be better equipped to handle the short term macro-economic weakness and expand beyond the borders.
Mustafa says the hike in fuel prices and easing subsidies would likely result in higher inflation. “However, the inflationary effect of transport cost led by higher fuel prices will be offset by the deflationary trend in international food prices,” he adds. “In the past, government has actively monitored the inflation scenario and has ensured retailers not to mark up prices unjustifiably. Therefore, we expect the government intervention to continue by gradually stabilising the prices in a justified manner.
Recent reforms have a direct impact on the cost structures for industrial companies. Industrial companies will face more pressure as a result of increase in government fees, customs duty along with electricity and water charges. Banks may also face slowdown in credit growth and possible margin contraction in the short term on account of rising interest rates. Investors and analysts have already priced in the changes that are likely to occur due to the recent measures. They have accepted the new normal for risk and adjusted to the prevailing reality. “We expect the market to bottom out this year and value buying to emerge soon,” adds Mustafa.
Lo’ai does not believe that the tariffs and taxes will lead to price hikes and unmanaged inflation. “As per the Oman development plan for 2016-2020 (ninth plan), the government is looking to maintain the inflation up to 2.9 per cent which is accepted, taking into consideration that the economies in the region as well as in Oman are still facing a lot of challenges and difficulties. “Oman is importing most of the goods and services from outside and Oman rial is pegged to US dollar and most of our imports are either from China, Japan and Europe. All these countries and their currencies were under pressure and they lost their exchange rates partially against a strong Dollar, which will help to curb the inflation.”
Ashok says the ninth five-year plan targets an average inflation rate of 2.9 per cent during the plan period. It is likely that inflation could be higher in 2016 given the proposals to increase taxes and fees as well as the reduction in subsidies. This would however, be a one-off inflation and is not likely to be significant.
Kanaga observes that the increase in diesel prices, which is used in trucks used for transportation, would lead to increase in cost of transportation of essential goods, resulting in higher retail prices. There will be a short-term inflationary pressure on food products and other consumer goods. The companies will try to pass on the additional burden to the end consumers. “With several fiscal reforms in place during the year, we believe that the economy would see relative slowdown in the non-oil economic growth over the short term. On the other hand, these fiscal consolidation and subsidy reforms are long term positives for the economy, which would reduce the apprehensions raised by IMF and other rating agencies on increasing subsidy burden over the past few years,” he says. The increase in fuel prices and also the anticipated increase in utilities such as water and electricity would have negative impact for companies in industrial, construction, food, oil marketing, services and consumer sectors. At the retail end, the overall consumer spending would reduce and also the inflation pressure would come forth in the ensuing months.
Robert says when subsidies are cut and corporate taxes are raised it almost certainly leads to inflation. “We see this to happen on a global scale. An example in the construction sector would be subcontractors increasing their quotations to make up for loss of revenue and profit. At the bottom line, the final client will pay for the incorporated increases.” It might also bring the industry to a halt or at least a slowdown in growth of revenues and profits.
According to Chandrasekr, the budget deficit is estimated at about RO3.3bn i.e. 38 per cent of overall revenues, and 13 per cent of domestic production. The government has announced that it will consider different financing options including but not limited to local and external borrowing with the clear message that it will not affect the local liquidity or bank credit, nor the private sector plans or its financing needs. Although, the current price of oil is lower than the government budgeted price, it is expected that the prices will not stay that long. As far as the prices at the retail level is concerned there will be greater monitoring. Hence the pressures, if any, are going to be very minimal.
Corporate tax
Ashok says one of the reasons why the government possibly has no other alternative other than to increase the rate of corporate tax and possibly widen the scope of withholding tax, is the expected decline in profits during 2015 which will have a direct impact on tax collections. The government’s move to increase corporate taxes could therefore assist in maintaining revenues from corporate taxes at 2015 levels. It should be noted that increase in tax rate from 12 per cent to 15 per cent will result in more revenue for the government only in 2017 as tax returns for 2016 will be due for submission only then. Widening of the withholding tax base can, however, help raise collections from the effective date of the decree. The tax rate of 15 per cent is not considered high compared to global corporate tax rates. The rate will be on par with Kuwait which imposes corporate tax of 15 per cent and will be still lower than Saudi Arabia where the corporate tax rate is 20 per cent. The difference, however, is that Oman imposes tax since 1994 on all businesses irrespective of nationality, whereas other countries in the GCC impose tax only on foreigners or foreigner’s share in profits of local companies. Businesses will have to consider this new tax rate when bidding for projects.
Lo’ai explains: “As long as the tax system is used as one of the monetary policy tools, it’s fine. We should be cautious and be alert using such tools. It might negatively affect our ability to attract FDI. Also we need to note that most of the countries are now chasing FDI and we should be very aggressive in doing that. I don’t mind tax on certain sectors or activities whose value added is limited to the local community, economy.” However, sectors and services which is adding value to the economy and to the country and also offering jobs to local Omani and also exporting goods and services, should be incentivised and appreciated by offering less tax rates.
Mustafa says while corporate tax rate in Oman has been on the lower band against the global average, a marginal increase in corporate tax won’t adversely affect investment or growth which is a part of the needed fiscal reforms.
Public-private partnership
Oman can witness an increase in public-private partnership deals following reduction in government spending and other austerity measures, says AbdulAziz. Government is inclined to continue with major infrastructure projects but requires more private sector participation in project financing. Hence greater collaboration between public and private sector in infrastructure projects of national importance can give a boost to the economy. The recently announced redevelopment plan of Port Sultan Qaboos is a good example whereby government is seeking to own 51 per cent and the rest to be funded by pension funds and private sector.
Oman’s capital markets will play an important role in funding government projects as issuances of government bonds will stimulate an otherwise inactive debt market, and privatisation of state enterprises will lead to a bigger, more liquid and diversified stock market. This is an appropriate time for the private sector institutes to introduce reforms in order to realise greater operating and financial efficiencies. In addition, we need to have less bureaucracy, less red-tape and much higher coordination amongst various departments and ministries. This could be achieved by implementing efficient procedures & processes, state-of-the-art IT systems and by following best-practices in each area. In summary, the private sector needs to do more with less.
Robert says Oman has to support the local industries and create an environment to make them flourish to benefit their people and economy in the long term. It should promote and assist start-ups in Oman besides supporting SMEs and fostering further backing to the private sector and tourism industry.
Plugging deficits
Oman has become one among the countries in the Gulf to seek funds from either the international bond or loan market to plug budget deficits primarily due to the decline in oil prices since June 2014. It has borrowed $1bn to cope up with the strains on its finances. Altogether 11 banks took part in the five-year loan.
AbdulAziz says Oman is more vulnerable to prolonged low oil prices as compared to other GCC countries because of its lower fiscal reserves (government assets are estimated at around 28 per cent of GDP compared with 114 per cent for Saudi). As a percentage of total revenue, the deficit is expected to gradually reduce from 38 per cent in 2016 to around 25 per cent in 2020. Prolonged period of low oil prices (below $40) and drawdown from the reserves for deficit financing may adversely impact the currency. “However, we expect the currency peg to hold as depreciation of Omani rial may do more harm than good as it will result in the rise of inflation. Historically, Oman has weathered major declines in oil prices and held on to the currency peg. The government has in the recent past reiterated its stance to maintain the peg for now. We expect GCC countries to coordinate and act together on currency decisions”, he adds.
Subsidies on fuel and electricity are expected to be more than halved, oil and gas expenditure is expected to decline by 14 per cent while developmental expenditure is expected to decline by 18 per cent compared to the 2015 budget. Private companies operating in sectors heavily dependent on government spending especially oil and gas and construction sectors have already been negatively impacted. Financial sector will also be impacted as asset values decline and liquidity crunch ensuing from lower government deposits put pressure on net interest spreads. Overall, lower economic activity will have a bearing on all sectors to varying degrees.
However, AbdulAziz feels that these extraordinary tough conditions will not last forever as oil prices are unlikely to remain low at current levels and government’s projects continue albeit at a slower pace. Oman’s five-year plan targets RO8.2bn investments every year with 5 per cent annual increase. The targets are based on oil price recovering from $45 in 2016 to $60 in 2020. This in turn should help support overall growth.
Ashok says the government’s borrowing as a percentage of GDP is estimated to be only four per cent. This is insignificant compared to the debt some of the developed countries have. For instance, Japan’s borrowing as a percentage of GDP is in excess of 200 per cent. Oman has been fortunate in that the government has over the years been building its reserves and transferring surpluses which were generated during times of high oil prices. In fact even in the ninth five-year plan, the government’s proposal is to transfer 15,000 barrels per day to an oil reserve fund starting from 2017.
It was only in 2015 that the actual deficit was significant at RO4.5bn and the government had to draw down from the reserves and raise additional borrowings. In the prior years, deficits, if any, were not significant. The continued low oil prices and the deficit during the plan period will no doubt put a pressure on the currency not only in Oman, but in the region. However, the fact that the deficit is expected to decline during the five-year plan from 38 per cent of total revenues budgeted in 2016 to 25 per cent of total revenue in 2020, should help.
Lo’ai says the exchange rate could be impacted if Oman is not be able to generate enough cash flow from foreign currencies in order to service its debt. “As we know, 80 per cent of the government revenues are from one source which is oil. And oil is sold by US dollars and the majority of the government’s expenses are in Omani rial. The pressure will be if we can’t manage our trading balance and maintain a positive gap in foreign exchange (FX) reserves. If the oil prices continue to drop in next few years and other FX sources are depleted and stopped, then we will have reasons to worry.
Lo’ai adds the current debt-to-GDP ratio for Oman is very low with current levels of debt at RO736.7mn (as per the CBO’s latest statistics) in terms of government development bonds and an additional RO250mn Sukuk which was launched in October 2015. “We believe Oman is in a strong position to borrow long term debt with Moody’s sovereign rating of Oman at A1 and S&P’s at BBB+, (last updated on November 20, 2015). The Omani rial will be pressurised downward if the government continues to borrow in order to fund its deficit due to low oil price and non-oil sector does not grow at the anticipated rate. If this were to happen, then in order to service its debt, the country’s balance of payments might come under further pressure, leading to downward pressure on the currency. It must be borne in mind that with incremental borrowing comes an incrementally higher borrowing costs, hence it is prudent to assume that the country will not be in a position to keep borrowing indefinitely. The currency will see easing off pressure once oil prices recover or if there are FDIs or government grants from Oman’s wealthier GCC counterparts and if the government’s economic diversification efforts fall in place.
Mustafa says Oman is the least leveraged country with debt to GDP only at 4.8 per cent as of 2014. “As a result, this provides adequate headroom for borrowing to fund priority projects that have long economic benefit for the country. In addition, the government has focused on raising non-oil sector revenues by increasing fees and corporate tax along with easing subsidies to curtail the deficit. The government would also narrow its deficit gap by gradually privatising its government entities to raise additional funds. Hence, we believe that currency devaluation is not a pressing concern in the near future.
Kanaga adds that deficit for 2016 is projected at RO3.3bn, forming 13 per cent of GDP and this would be covered by domestic borrowings (9 per cent of financing), international borrowing (27 per cent), grants (18 per cent) and also from the existing financial reserves (46 per cent of financing deficit).
Chandrasekr says the deficit is covered by borrowing from domestic and external sources, such as issuance of Islamic bonds, development bonds, treasury bills and commercial loans. With a low debt to GDP ratio, the situation is comfortable. “This leads us to the inevitable question: Will this impact the currency? I do not think so, since the government has also announced public-private partnership leading to the privatisation of a number of current ventures in water, electricity and support services via tender. This will be an additional source of revenue. Vigorous efforts to increase the non-oil resources too are expected to bear fruit.”
The road ahead
According to AbdulAziz, the way forward is the diversification of the economy through continued development of non-oil economy, greater participation from the private sector in generating employment and promoting entrepreneurship. Special economic zones (SEZAD) and free zones (Sohar, Salalah) will be key areas boosting economic activity as they attract foreign direct investment. Government projects will continue to be a major source of employment generation. These projects include Muscat Airport, Oman Exhibition Centre, Oman Rail, South Batinah Logistic Area, Waterfront development at Port Sultan Qaboos and the recently announced Mining Development Oman among others. He says: “Given the various steps taken by Oman’s government, we are confident that the country will emerge stronger for a continued period of sustainable growth over the long term, inspired by the vision and leadership of His Majesty Sultan Qaboos Bin Said. We are firm believers in the strength of the private sector.” He adds: “ Countries can achieve sustained long term growth only with a vibrant private sector. The government’s 2016-2020 Five Year Plan includes numerous policies and programmes to diversify the Omani economy into sectors such as manufacturing, mining, transport and tourism.” Targeted projects for private sector include Oman Rail (around RO5-6bn investment), tourism projects, logistics, fisheries projects and others. This will help expand the role of the private sector. The labour market will benefit if employers introduced shorter duration and more flexible employment contracts to be able to respond to changing market conditions. In addition, the public sector should be open to the idea that unless the employees deliver satisfactory performance, jobs cannot be guaranteed for life. These reforms will bring about a healthy competitive culture, which will reduce costs and improve productivity. AbdulAziz avers, “Businesses have to be pro-active and adapt to change, something we believe in strongly at Ominvest. The successful completion of the Ominvest–ONIC merger has helped us in positioning ourselves well for implementing our growth strategies on a larger scale through synergies. This, we expect, will lead to creating job opportunities for Omani nationals, helping businesses grow and attract FDI in the country.”
Ahmed Amor points out that since subsidies encourage over consumption, a number of austerity measures announced should help in creating an atmosphere of cost consciousness. As a country Oman has to remain focused and look at its most pressing priorities. “We need to continue taking bold measures and pursue the economic diversification agenda with greater urgency. We are confident that these reforms will bring about greater efficiency, productivity and confidence in our economy’s resilient strength. In the long run, it encourages greater foreign investments by ensuring that the right economic atmosphere and investment climate prevails in the country.”
Mustafa says in the past, government has taken proactive measures to diversify the economy as well as promoting growth of the non-oil sector which has been consistently growing more than the GDP growth rate. Going forward, the government will continue to speed up the diversification process and would resume funding long-term priority projects that could create additional jobs in the market. The government should make greater efforts to include the private sector with a better policy framework and could encourage them to invest in core sectors such as tourism, mining, manufacturing, fisheries and farming.
Hatem says uncertainties arising out of low oil prices may hit the construction sector significantly. Two important steps need to be taken to help the construction industry weather the storm. These are ensuring cash flow into the industry through new projects and ease in doing business.
However, Ashok insists that the government needs to make sure that there is continued spending on development. Whilst the 2016 budget suggests an 18 per cent decline in development expenditure, statements from the Supreme Council of Planning in Oman on the five-year plan indicate that the total development spending during the plan period is expected to be around RO41bn. This includes share of the private sector in development spending. In fact, the five-year plan rightly focuses on a greater role for the private sector to be achieved through privatisation programmes, developing SMEs, public-private partnerships and improving the investment climate. Diversification to non-oil sectors has to be the medium and long term solution. The government has identified five sectors in this regard, namely manufacturing, transportation and logistics, tourism, fisheries and mining. This is in addition to the vertical expansion in activities depending on oil.
Lo’ai says GCC countries have long been working on the diversification, and Oman has been in the forefront in the drive to diversify its economy and the same has been further promoted in its vision 2016-2020. The country will have to develop its manufacturing, transportation and tourism sectors and at the same time needs to promote measures to increase trade, attract more foreign investment and indoctrinate new taxes in the system. Oman has been doing well on the SME front and the same needs to be pushed even further. The country also needs to invest in physical infrastructure, and strengthening of the legal and regulatory environment to reduce the cost of doing business. In a nut shell, the Sultanate has to introduce business-friendly environment, light regulations, modern infrastructure and efficiency in project implementation to diversify and look beyond oil.
Says Chandrasekr: “Oman is adding value to crude refining by derivatives, so that various other value-added product can come through. The government’s efforts to building a large and modern port in Duqm, will be a big boon for ships exporting oil and manufactured goods. The idea of developing it into a major regional logistic hub will certainly ease the pressure on dependence on oil alone. In the short run, many of those measures might appear stressful but, full credit is due to the government for trying to manage it in the best possible manner.
Dr Shirish says Oman’s strategic position needs to be exploited. The ease of doing business and the availability of electricity and gas should be marketed well to bring in investors. Secondly, the vast tourism potential needs to be tapped. Oman is by far the best country to visit in the region. The Indian sub-continent should also be the target. In order to ease the visa procedures, the Sultanate needs to have a look at bringing an online visa process for the Indian sub-continent. We need to ‘Make Oman’ a destination for all. Further, we need to encourage filming by getting a Bollywood or Hollywood film shoots done in Oman as the film industry is the biggest churner for tourists to come in.
Overall, the ninth five-year plan appropriately reflects the challenging oil market and is prudently based on a price of $45 to $60 for the next five years. Non-essential expenditure has been curtailed with greater focus on investment spending and support to the non-oil based sectors. The significant fall in commodity prices should also help in reducing expenditure, says a KPMG analysis of Oman’s ninth five-year plan and budget. If the government succeeds in improving the investment climate and in enhancing the role of the private sector, as outlined in the plan and as successfully achieved in the past particularly in the power, water and port sectors, there is every reason to hope that Oman will yet again emerge successfully from the challenging global and regional economic environment.
With several fiscal reforms in place during the year, there is hope that the Sultanate will weather the oil price decline. The fiscal consolidation and subsidy reforms are long term positives for the economy, which would reduce the apprehensions raised by IMF and other rating agencies on increasing subsidy burden over the past few years. Tapping the vast tourism potential, more thrust to SMEs and the manufacturing sector and renewed commitment to economic diversification to reduce the dependence on oil are certainly the way forward to energise the Sultanate’s economy.